Certified Bitcoin Professional Practice Exam

Are all dollars in a bank account backed by a paper note in the bank's vault?

1. True

2. False

3. Only in Federal Reserve banks

4. Yes, but only for cash deposits

The correct answer is: False

The assertion that all dollars in a bank account are backed by a paper note in the bank's vault is false. In modern banking systems, especially those operating under a fractional reserve banking model, banks are not required to hold a one-to-one ratio of deposits to physical cash. When customers deposit money into their accounts, the bank is allowed to use most of those deposits to make loans or invest. This means that only a fraction of the total deposits is kept in reserve as cash or equivalent liquid assets, and the rest can be utilized for lending or other investments. Additionally, most transactions today are conducted electronically and banks manage their reserves to meet withdrawal demands while also engaging in lending activities. Hence, the idea that every dollar in a bank account has a corresponding paper note stored physically in a vault does not align with how contemporary banking operates. This system allows the banking sector to efficiently create money through lending, contributing to economic growth while still maintaining necessary liquidity to fulfill customer withdrawal needs. The incorrect responses suggest different scenarios regarding bank reserves or the backing of dollars that do not reflect the reality of how modern financial institutions work.